Berkeley Program in Law and Economics

It has long been said that the Japanese corporate governance does not pay sufficient attention to

shareholders as the owners of the corporation. An yet, despite this seeming lack of shareholder ownership,

Japanese firms have performed quite well until recently. This paper seeks to solve this conundrum by

developing the "Company Community" concept as a positive model of the Japanese corporate governance. This

model is used to illustrate how the Japanese system of corporate governance solves the hidden problems of the

corporate law. These hidden problems of corporate law are common to all developed economies and consist of

the dual problems of balancing between monitoring and autonomy of management and balancing between

money capital and human capital.

The company community concept solves these problems through an intricate system of monitoring

consisting of three levels. The first level is the in-house monitoring by core employees who are quasi-residual

claimants and monitor management as a participant in the Community. The second level is the monitoring by

cross-shareholders in the firm, the main bank in particular. Cross-shareholding also has the effect of stabilizing

the management position against outside control. The third level is the monitoring by exit of the outside

shareholders. These multiple levels of monitoring have the effect of stabilizing management yet upholding

shareholder ownership as the end game norm.